It was 20 years ago today, and Britain was facing groundbreaking change. The Australian soap Neighbours stormed the nation's television screens, the BBC launched its One O'Clock News programme - and the City of London was rocked by "Big Bang".

Electronic trading systems were switched on and the secluded cabal of privately owned firms that dominated City share dealing was smashed. The old-fashioned way of dealing, head to head on a sweaty trading floor in the stock exchange, was halted overnight.

As a result of the seismic changes brought in by Cecil Parkinson and Sir Nicholas Goodison, respectively the then trade secretary and chairman of the London Stock Exchange, big United States and international banks raced to gain a foothold in the City to take advantage of the liberalised markets - helping to turn London into one of the world's busiest financial centres.

At last night's anniversary celebration in the City, the Lord Mayor of London, David Brewer, told a distinguished audience that "without Big Bang, the City is very unlikely to have achieved today's prominent position".

The reality for the men - and it was largely men - working in the City at the time was that their working days got longer and their employers, often partnerships, were taken over by non-British firms. Before Big Bang, the market opened at 9.30am and closed mid-afternoon, with long lunches in between. Now, companies begin making their business announcements at 7am and stop at around 6.30pm.

Foreign firms were unheard of. The 300 member firms of the LSE were all domestic. By the following year, 75 were foreign-owned, while today, about 65% of the City's workforce is paid by overseas employers.

Terry Smith, another speaker at last night's bash, believes Big Bang was about more than simply share trading. "It turned London into the world's biggest capital markets for foreign exchange, bonds and derivatives as a direct consequence of the greater professionalism and influx of more staff," said Mr Smith, who was then head of the financials desk at the now defunct BZW.

"People don't get in late and don't go out for boozy lunches [any more] ... But instant data and dealing do not necessarily equal better investment decisions. The world's best investor, Warren Buffett, prides himself on never looking at a screen," said Mr Smith, who is now chief executive of Collins Stewart Tullett brokers. Even so, technology has speeded up the process of buying and selling shares. In the past, it could take 20 minutes. A broker would telephone a jobber on the stock exchange floor who would go into the pit to get a quote. Now, it takes seconds at a computer screen.

As a result, the amount of share trading has increased 15 fold, while trading in derivatives, largely on London's Liffe market, is up 59 fold.

Britain now depends on financial services for its income. In 1986, the country exported £2bn of financial services. By last year, this had risen to £23bn. Added to the UK's net surplus on investment income, this pays for the most of the national deficit on trade in goods.

"People often ask me if it's a good thing for the UK now to be dependent on financial services in the same way as it depended on shipyards and steel plants in Victorian times," said Douglas McWilliams, of the Centre for Economics and Business Research.

"Economists can get into deep water if we start to try to suggest that one form of economic activity is intrinsically superior to another form. But there is one important difference. At the time of Big Bang, manufacturing industry employed five million people and even today employs three million. The City supports the country's overseas account with only 330,000 direct employees."

This reality fosters the inequality between those in the City and those outside to whom the salaries and bonuses in the financial world are attainable only by a lottery win. But Mr McWilliams argues that without the City, everyone in the UK would be worse off.

Leading financial figures believe that the industry should be encouraged to thrive, but give warning of the challenge to ensure that London does not, like the manufacturing industry, find its position eroded by lower cost and fast-growing Asian economies.

The Lord Mayor, says competition from India and China makes it hard to predict what financial markets will look like 20 years from now. "We in the City must keep our eye on the ball. The challenge is to maintain our competitive position," he said last night.

Michael Snyder, chairman of the policy and resources committee of the City of London council, says Britain must focus on three main threats: tax, regulation and infrastructure. "International businesses are very mobile. They don't have to have their main domicile here in the UK," he said, referring to HSBC's recent comments about the possibility of moving its base because of British taxes. On regulation, he believes that the UK needs to stand firm against the creep of European Union directives; and on infrastructure accept that the City needs the proposed Crossrail link through London.

Twenty years on from Big Bang, the London Stock Exchange is itself up for grabs - facing a possible takeover bid by the US hi-tech market Nasdaq. Few will argue that this matters, provided the regulatory regime is unaltered. After all, they point out, Liffe, the City's derivatives exchange, is now owned by the French-Belgian-Dutch group Euronext.

This week, however, the foreign ownership of Liffe has become an issue, with its chief executive, Hugh Freedberg, urging customers to keep using Liffe in the face of a possible merger between Euronext and its rival Deutsche Börse of Germany. Any marriage between the two - opposed by Euronext, which wants to tie up with the New York Stock Exchange - is expected to lead to Liffe losing out to the German market.

Mr Snyder wants the government to lobby the EU competition authorities to ensure they deal with representations about a possible Euronext-Deutsche Börse merger in an open way. "I sincerely hope [the competition authorities] don't get influenced by national politics in allowing this anti-competitive bid to go ahead," he said.

The idea of Deutsche Börse merging with Euronext to create a derivatives exchange with a 92% market share in Europe "is completely contrary to the philosophy of the City of London," said Mr Freedberg. "The reason the City thrives is because it is open, fosters competition and doesn't take account of who owns what. London offers a framework for entities from wherever they are on the globe to compete on a level field, and may the best man win."

Backstory

Big bang was brokered by Sir Nicholas Goodison, then chairman of the London Stock Exchange, and Cecil Parkinson, then trade and industry secretary, in 1983 to allow the LSE to stave off a long-running investigation into restrictive practices. The changes came in on October 27 1986 when fixed commissions - designed to ensure small firms could survive - were axed and technology introduced that led to shares being traded on computers rather than face to face. Other changes allowed firms to be both stockbrokers, giving advice, and stock jobbers, executing trades, and lifted the restriction on stockbrokers being only UK owned.

'A protected, cosy old club'

Big Bang was a continuing revolution rather than an overnight event. In strategic terms, most of the brokers, jobbers and merchant banks had been repositioning themselves for the change since 1984. This included my old firm, Smith Brothers, who had merged their market-making capabilities with brokers Scott Goff Layton to create a "dual-capacity" operation. We had also forged a relationship with Rothschilds, who acquired 27% of our equity in 1986. Our firm was re-named Smith New Court.

Technically, we were well prepared. The trading room had been built and the systems and processes that we would be using on and after the day had been in test mode for months. We maintained a physical presence on the floor of the London Stock Exchange, in addition to our trading room, but this proved unnecessary. By the end of the week, we were the only people there, and we too abandoned the floor shortly afterwards.

Big Bang turned London's equity market from a protected, cosy old club into the vibrant global centre it is today. Of all the changes, the introduction of outside capital to stock exchange member firms had the biggest impact. Without this, it would have continued as a domestic market but in global terms it would have been an also-ran.

The market's regulatory regime has also been key. Now, as then, we have a robust and fair regulatory system with a relatively light touch. This forms an important part of the magnet that attracts capital to the City of London.